The Supreme Court has paved the way for bankruptcy estates, through litigation, to claw back value from shareholders and other participants that benefitted from pre-bankruptcy leveraged buyouts and other transactions, eliminating a safe harbor that formerly stifled such litigation.

On February 27, 2018, in Merit Management Group, LP v. FTI Consulting, Inc., the Supreme Court closed a loophole that for many years limited bankruptcy estates and their constituents from successfully attacking leveraged buyouts and other transactions that left troubled companies with a significant amount of new debt while benefitting the sponsor and legacy shareholders.

The Court unanimously held that the involvement of a financial institution as a conduit in a transaction does not shield the transaction from scrutiny as a fraudulent conveyance under the Bankruptcy Code.

We anticipate a renewed interest in litigation attacking pre-bankruptcy leveraged buyouts and other transactions as constructive fraudulent conveyances as a means to enhance junior creditor recoveries.

Kasowitz’s Bankruptcy Litigation and Restructuring team is one of the leading bankruptcy groups in the country. We have extensive experience representing parties in out-of-court workouts, restructurings, insolvency and bankruptcy litigation, and all related and attendant state and federal court litigations.